Apple Pay: Why the Apple Inc. Service Is Here To Stay

iPhone users are adopting Apple Pay faster than many expected, giving investors yet another reason to love Apple Stock.

Andrew Tonner
Andrew Tonner
Jan 3, 2015 at 10:39AM
Technology and Telecom

Source: Apple.

Hopefully, you noticed.

Apple (NASDAQ:AAPL) is back -- and in a big way.

Even as the competition intensifies, Apple's current iPhone "super cycle" is very much under way and should help make 2015 a year of fresh records for the world's most valuable publicly traded company. And although the iPhone 6 is by far the most important narrative for Apple in 2015, there's another key aspect of the company's business model firmly taking root as well -- Apple Pay.

Apple Pay's surprising success
In a recent research post, investment research firm ITG published its study of the digital payments market in November. And as you might have guessed, Apple Pay made its presence felt in a major way.

According to its report, Apple Pay accounted for 1% of total digital payment dollars spent in the month of November. That might not sound like much, but put in proper context, this is indeed an impressive feat.

First, keep in mind Apple launched the iPhone 6 and 6 Plus in late September, meaning November was only the second full month in which Apple Pay was active. This suggests Apple Pay's adoption has been significant among iPhone 6 and 6 Plus users, a trend that should only accelerate as 2015 progresses. For comparison's sake, Google Wallet only represented 4% of November's total digital payment value, despite being launched in 2011.  

It's also important to contextualize the relatively limited number of vendor partners that support Apple Pay. Only available for iPhone 6 and 6 Plus users in the U.S., Apple only lists 31 partner banks and 43 brands  that support the service, and even some of those might overstate Apple Pay's actual present level of support. For example, Apple lists Chevron as a current partner. However, a recent tweet from Chevron's official Twitter account suggests it won't broadly support Apple Pay until early 2015. 

All of this is to say that achieving 1% of total global payment volume in November was in fact quite the feat given Apple Pay's current limited scope.

Why Apple Pay matters
Apple's true economic engine is its high-margin, ultra-lucrative hardware like the iPhone and the iPad. As such, Apple Pay is unlikely to significantly move the needle for Apple and its shareholders. However, it would also be (small-f) foolish to overlook Apple Pay, and similar ancillary services, for being the critical glue that helps hold Apple's ecosystem together.

The company leans heavily on features like Apple Pay to keep users engaged with Apple's devices and to also prevent them from leaving. The iTunes and App Stores, for example, also serve as this same "glue." By providing paid content (iTunes and App Stores) and efficient, safe service platforms (Apple Pay and iCloud), Apple hopes to create a high opportunity cost for users to leave its ecosystem should they opt to purchase another smartphone or tablet.

The economic term for this phenomenon is a "switching cost," and Apple is by no means alone in its attempt to hold users captive on its own platform. Amazon does the same thing with its Prime service, to name another high-profile example

All of this is to say that, although in its early stages, Apple Pay appears to be quite successful. Even though 2014 proved to be an outstanding year for Apple stock, there are plenty of reasons, including Apple Pay, to remain bullish on Apple into 2015 and beyond.